Keith Woodford says Yili’s bid for Westland Milk can look different to farmers with livelihoods at stake than it does to outsiders

The time has come when Westland’s dairy farmers must make their decision. Do they want to take the money and go with Chinese mega-company Yili, or do they wish to struggle on as a co-operative? We will know the answer after the July 4 vote.

If farmers vote to take the money, it will then be up to the Government to agree or refuse to accept Yili as the new owner. I will be surprised if they disallow the sale under the relevant OIO provisions. The ramifications of that would be severe.

Also important is whether or not the approval from Government is quick or drawn out. It is in no-one’s interest that it be drawn out, but OIO approvals can be remarkably slow. Yili could step away if approval is not forthcoming by 31 October.

It seems likely that Westland farmers will approve the sale to Yili, but with great sadness and also bitterness at what they are giving up. Most of them did not see in advance the extent of the mess their co-operative had got into. I have written about that previously.

Nevertheless, the sale is far from guaranteed. It requires 75% support from votes that are cast, and 50% support from all eligible votes.

The two largest shareholders are PAMU (Landcorp) and Southern Pastures. PAMU stated some weeks back that they had made no decision as to how they would vote. In contrast, Southern Pastures has said they will abstain.

However, the direct effect of how the big entities vote will not be great. This is because voting shares are capped to ten votes per entity. Most of the smaller farmers will also have ten votes or very close thereto.

My expectation is that PAMU will vote for the sale. There is an $11 million cash payout for them at stake, followed by an ongoing series of superior milk cheques. If they abstain or vote against the sale, it will be for non-financial political reasons and knowing that it is unlikely to affect the final outcome.

Southern Pastures (itself largely foreign owned) is in a unique situation as it has potential to be a major beneficiary of Westland’s proposed specialty-milk program. The details of how that might play out under alternative ownership structures (Westland Co-operative or Yili) are not available. Southern Pastures is also a 50 percent shareholder in Lewis Road and regardless of who wins Westland, Southern Pastures will be keen to maximise benefits from that Lewis Road relationship.

It is easy for those outside the Westland dairy industry to criticise the proposed sale. Perspectives can be different depending on whether one’s livelihood is at stake. For outsiders it is often a philosophical and emotive issue, where issues of foreign ownership entangle with the specifics of a Chinese company.

In recent days the debate has become further entangled with information that the senior Westland management will receive progressive bonus payments from Yili if the sale goes through, as long as they are still employed at the time of each bonus payment. Westland’s directors have pointed out that management is not involved in the sale process. Rather, the proposed payments to management by Yili reflect that Yili does not want to take over the shell of company, with physical assets in place but without a senior management team.

The incentives for farmers to accept the deal are strong. To start with, Westland’s own professional adviser, Grant Samuel and Associates, has estimated the value of the shares is somewhere between 88c and $1.38, depending on specific valuation assumptions for such a highly leveraged company. In contrast, Yili is offering $3.41 per share to farmers as a cash payout.

The ongoing milk payout from Yili for the next ten years is guaranteed as being no less than the Fonterra milk payout, or if something drastically negative should happen to Fonterra, then no less than the mean payout of the next three largest South Island processors.

Yili is also agreeing that for the next three years the milk payment will be no less than what it pays its Oceania Farmers. In recent years they have been paying those farmers more than the Fonterra payout. They also pay more quickly which helps farmers’ cash flow.

A relevant question is how can Yili afford to make such guarantees and will they stick? The answer is that with the Chinese Government looking over Yili’s shoulder, those guarantees will stick. The only caveat is if New Zealand gets caught in cataclysmic happenings between competing world powers.

In contrast, any such guarantees from non-mega non-Chinese companies would be of limited value. Other companies would have much less strength to deliver on such guarantees. As for Westland itself, the Grant Samuel analysis makes it clear such payouts are likely to be well beyond Westland’s reach.

ANZ is the Key bank on the West Coast, and ANZ will indeed be sweating on the farmer vote. Of course, the ANZ chiefs also have some other things on their minds right now. But for them, their West Coast exposure is not just to Westland Co-op itself. Their greatest exposure is to the dairy farming businesses on the Coast that provide the milk to the co-operative.

Right now, the land market on the West Coast is dead. Should the Westland sale not go through, then ANZ is likely to end up with many impaired loans. Not only are Westland’s farmers struggling with their cash flow as a result of poor co-operative performance, many of the balance sheets look very poor. There will be questions to be answered back to ANZ’s Australian masters.

Should farmers agree to sell but the Government decline the sale, then all hell will break loose. The Government will therefore need to reflect on the implications for the West Coast. Let there be no doubt, the West Coast without a vibrant dairy industry would be a huge socio-economic mess.

My expectation is that Yili will make a success of things. They have integrated supply chains through to Chinese consumers. They already understand, from their Oceania operations, the intricacies of doing business in New Zealand.

One of the attractions of Westland to Yili will be the Rolleston (Canterbury) operations. Ironically, those developments have been fundamental to Westland’s problems. However, the Rolleston infrastructure, including availability of land appropriately consented for further milk processing activities, would give Yili a Central Canterbury foothold.

I would expect Yili to move quickly with further developments on the Rolleston land and take on further suppliers. Given the chance, there will be many Fonterra farmers who would jump quickly across to Yili, just as occurred with Oceania.

Ironically, if farmers vote against the Yili deal, or if Government fails to approve the deal, then Westland will undoubtedly have to sell assets as part of its survival strategy. These same Rolleston assets are the only ones that will be attractive to a buyer. They might still end up with Yili.

We do indeed live in interesting times.

*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. His articles are archived at http://keithwoodford.wordpress.com. You can contact him directly here.

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And yet here we are at what I think is the tail end of the great neoliberal experiment, and a pragmatic nationalist approach to what will be essentially ownership of strategic food-generating assets by a foreign government whose interests overlap very little with ours is apparently much more palatable, especially given the movement against unfettered globalism that we're seeing at the moment.

Jetliner,
I have gone back and read your article from 2014.
I think that the current NZ policy is broadly one of 'pragmatic nationalism' as you advocate. Such a policy leads to some proposals being accepted as being in the national benefit and others rejected.
Assuming that farmers do vote for the Yili offer, I think the Government, when it looks at the other alternatives, will also decide to say 'yes' although there may be some prior posturing.
I cannot see Westland surviving by itself. It is extremely vulnerable and without help is going to fall over. The only way it can survive by itself is if it pays its farmers a low milk price, and then the farmers will fall over. Even as it is, at least half the West Coast dairy farmers would get out if they could. All of a sudden a whole lot of so-called national assets have minimal market value.
KeithW

You could at least be honest about who will be the purchaser which is, of course, the Chinese Communist Govt that wholly owns Yili, as they did the company that took control of Silver Fern Farms, under a different name of course to throw you off the trail.
I cannot believe that even one person thinks this is a good idea, it is not.

Just as food security is set to become a major issue for nations we've got a bunch of folk here telling us that selling off NZ's strategic land assets is the prudent thing to do and will benefit us all greatly.

But control of the industry is, only Fonterra to go now. Can you not see the danger lurking here? I actually struggle to accept that someone in a position such as you are, is comfortable with the notion that the GOVERNMENT of communist China will have so much control of our primary industries. I am sorry, but it is loony bin stuff.

PocketAces,
You might like to ponder as to the alternative. Almost certainly, Westland can not survive into the medium term by itself. The only alternative I can see is mayhem followed by direct Government intervention. So if Yili is not a good idea, what is your idea?
KeithW

"The only alternative I can see is mayhem followed by direct Government intervention."

But enough about the only alternatives you can see. Mayhem? Sounds scary. How about skip that bit and go straight to the government intervention part. What portion of the Wellbeing Budget would it take to revamp how NZ handles one of its key industries into some sort of coherent policy?

That is just silly. How does rolling up loss-making assets into public owership make any sense, even in the name of nationalist jingoism? That is the fastest way to undermine our productivity. Been there, tried that (Landcorp) and it always ends in tears or failures. What is forgotten here is that this is a two-sided deal. Yili is buying, our farmers are selling. They end up with a factory, we end up with money that can now be put to better use. And besides, our farmers actually don't have to sell they milk to Yili. They can sell it to anyone else. But Yili recocognises this vulnerability; they are offering Westland farmers Fonterra prices. So those farmers, and New Zealand will be net better off than the present situation. And the present situation is going backwards fast.

I suspect that 'nationalising' Westland is just code for kicking the can down the road to when the taxpayer has wasted a whole lot more, the farmers supplying dwindle away, and the enterprise just collapses with a big Crown writeoff. It's about the worst solution imaginable.

The best solution is that the Westland co-op can invest in product development and market building. But it has shown that it can't do that while paying farmers a fair price. So that is off the table now.

The next solution is what is on the table; lining up with an owner who has huge market access, and who wants this supply to feed a premium line in their home country. And they are paying local producers a fair market price, something they haven't had for a long time. Maybe most of them will now stay in business.

Can you provide one example of farmers prospering after selling out their chance to realise any value from what they produce? Westland may have been performing poorly, but Yili will only pay enough to ensure supply, and I can't think of a primary industry in which farmers prosper as a result. The peanuts that farmers are going to receive for selling out will disappear in a flash, and they and future generations will be nothing but glorified farm managers for China.

If it is to be government owned, then it must be our own. Yili (or rather the Chinese Communist Govt) are not buying into this to save the farmers, not one bit, they are doing it to ensure food security and control of same for China. It will never, ever return to NZ hands.
Again, I am staggered that you find this acceptable.

Money v values.
As an "outsider" I cannot have truck with selling national assets to an authoritarian dictatorship.
Russia, pre 1991, was always the big evil as far as liberal press was concerned and Western governments
But China, it seems is different. People bend over themselves not to state the obvious in respect to their human rights record and their intentions re food chains

Good article.
Seems really quite simple. The money offered is really damn good, would Fonterra shareholders say no to a $2 premium on their current share price? The only reason not to sell is political.
While being coerced into selling is not good, some kudos must be given for the fact they have something very valuable to sell, again Fonterra may not be in that particular place at the moment.

"The answer is that with the Chinese Government looking over Yili’s shoulder, those guarantees will stick".
Just look at Mainzeal. Fonterra. And what a myriad of other Chinese companies have done to NZ.